Switzerland: Larger fish to fry

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Switzerland's largest public Pensionskasse, Publica, has a new director but the tracks towards a more sustainable future of the fund had been laid before his arrival, finds Barbara Ottawa

"The fund is bigger, but all public funds are similar in their administration and Publica has a sound organisational structure, so the transition was quite easy for me," says Dieter Stohler, former managing director of the Pensionskasse Basel-Stadt now head of Switzerland's largest public pension fund, Publica.

As of January 2012, he succeeded Werner Hertzog who left to become head of Aon Hewitt Switzerland after bringing several changes to ensure long-term stability in the CHF33bn (€27.5bn) fund for civil servants and federal employees.

Publica, which manages 20 collective schemes, including funds for federal employees and various universities, will be lowering its conversion rate to 6.15% by 1 July this year. A measure that will be softened by financial compensations for the measures financed from existing buffers, confirms Stohler. "People want safety in their pensions and they expect promises to be fulfilled", the new director notes.

On the asset management side, Susanne Haury von Siebenthal's responsibility, Publica has introduced a split asset allocation for open and closed schemes to mirror the "different risk capacities of the schemes and helps to optimise the asset allocation over the long-term".

In 2011, the higher risk taken in the open schemes (which totals CHF28.1bn) with a 29% equity allocation did not pay off as the strategy only returned 1% compared to 5.67% for the closed schemes (CHF4.7bn in total) with 21% real estate exposure and 68% in bonds.

Overall, Publica has increased diversification within asset classes while sticking to its focus on indexed investments, a lot of which are managed in-house.

"There are only very few managers who are capable of achieving a risk-adjusted market outperformance and it is difficult to find them - so we are taking on the challenge in passive investments of finding the right benchmark," says Haury.

In its bond portfolio, Publica has added corporate bonds to its high-quality government bond investments, which are managed in-house close to an index. Two corporate bond mandates, also with a narrow tracking error, went to Union Investment and Standard Life last year. Haury confirmed that emerging market debt investments are outsourced as well. All bond investments are FX-hedged.

What you still won't find in Publica's portfolio are private equity investments. Haury is sceptical because of the illiquidity of the asset class. "Because of our net outflows of members based on our membership structure we need a lot of liquidity," the head of asset management explains. Further, given the size of Publica's assets the fund needs a certain size for investments to fit the portfolio.

Additionally, Haury is wary of the "asymmetry of information" in the private equity sector as there is less coverage by analysts, less information available than with listed companies and "many investors know more than we do about this sector".

Therefore, the only alternative investments Publica hold are commodities with a currency hedge making up 6% of the total portfolio of open schemes within the collective fund.

And Haury's motto for investments is simple: "Don't do anything you do not understand".
Domestic real estate plays a major role in the portfolio of Publica's closed schemes and is only made up of Swiss bonds, foreign and domestic equities as well as direct investments into Swiss properties.

In the portfolio for open schemes, directly-held domestic real estate only makes up 5% of the assets. Over the next years the exposure is to be hiked to 8% and diversified into indirect holdings in Europe and the US.

Swiss property yielded good returns over the last year and many analysts think that this trend will continue, especially based on immigration forecasts.

But Haury warns that the forecasts of increased migration supporting the Swiss property market are just a prognosis, that "immigration is not a law of nature" and that "housing trends might change".

For 2011, Publica reported a funding level of 103.1%, 1.4 percentage points lower than the year before due to overall performance of 1.71% compared to 5.16% in 2010.

While this is better than the market average for 2011 at 0.1% and the legal minimum interest of 1.5%, as well as Publica's internal benchmark, which returned 1.19%, it was not enough to increase the funding level.

In its preliminary 2011 report, the fund once again published the so-called "economic funding level" which calculates liabilities based on a risk-free interest rate without expected returns from the capital markets.

This figure dropped to 77.8% from 84.1% and Publica notes that in 2007 it was still above 90%.

The fund explains that given the "still quite high" discount rate, the so-called "technischer Zins", of 3.5% for open and 3% for closed schemes the economic funding level allows to "assess the situation of the fund more effectively".

Stohler points out that "no cuts are planned to the discount rate for now but they are being considered".

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